UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM
For the quarterly period ended
For the transition period from ____________to____________
Commission File No.
(Exact name of the issuer as specified in its charter)
| (State or Other Jurisdiction of incorporation or organization) | (I.R.S. Employer I.D. No.) |
(Address of Principal Executive Offices)
(Registrant Telephone Number)
The Registrant does not have any securities registered pursuant to Section 12(b) of the Exchange Act.
Indicate by check mark whether the Registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the Registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large, accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o |
| Smaller reporting company | |
| Emerging Growth company |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o
Our website is www.konatel.com.
Our common stock is quoted on the OTC Markets Group, Inc. (“OTC Markets”) in its “OTCQB Tier” under the symbol “KTEL.”
| 1 |
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
The number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date:
| Common Capital Voting Stock, $0.001 par value per share | shares | |
| Class | Outstanding as of March 31, 2022 |
References
In this Quarterly Report, references to “KonaTel, Inc.,” “KonaTel,” the “Company,” “we,” “our,” “us” and words of similar import, refer to KonaTel, Inc., a Delaware corporation, formerly named “Dala Petroleum Corp.,” which is the Registrant; and our wholly-owned subsidiaries, KonaTel, Inc., a Nevada corporation (“KonaTel Nevada”), Apeiron Systems, Inc., a Nevada corporation doing business as “Apeiron” (“Apeiron Systems”), and IM Telecom, LLC, an Oklahoma limited liability company doing business as “Infiniti Mobile” (“Infiniti Mobile”).
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance, or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Quarterly Report. We cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate, and therefore, prospective investors are encouraged not to place undue reliance on forward-looking statements. You should carefully read this Quarterly Report completely, and it should be read and considered with all other reports filed by us with the United States Securities and Exchange Commission (the “SEC”) that are contained in the SEC Edgar Archives. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
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KONATEL, INC.
FORM 10-Q
March 31, 2022
INDEX
| Page No. | |
| PART I – FINANCIAL INFORMATION | |
| Item 1. Financial Statements Footnotes | 4 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 17 |
| Item 4. Controls and Procedures | 17 |
|
PART II – OTHER INFORMATION |
|
| Item 1. Legal Proceedings | 18 |
| Item 1A. Risk Factors | 18 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 18 |
| Item 3. Defaults Upon Senior Securities | 18 |
| Item 4. Mine Safety Disclosures | 18 |
| Item 5. Other Information | 18 |
| Item 6. Exhibits | 19 |
| SIGNATURES | 20 |
PART I - FINANCIAL STATEMENTS
March 31, 2022
Table of Contents
| 3 |
KonaTel, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| March 31, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Accounts Receivable, net | ||||||||
| Inventory, Net | ||||||||
| Prepaid Expenses | ||||||||
| Other Current Asset | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment, Net | ||||||||
| Other Assets | ||||||||
| Intangible Assets, Net | ||||||||
| Other Assets | ||||||||
| Investments | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable and Accrued Expenses | $ | $ | ||||||
| Right of Use Operating Lease Obligation - current | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Right of Use Operating Lease Obligation - long term | ||||||||
| Note Payable - long term | ||||||||
| Total Long Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, $ par value, shares authorized, outstanding and issued at March 31, 2022 and outstanding and issued at December 31, 2021 | ||||||||
| Additional Paid In Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
KonaTel, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | $ | ||||||
| Cost of Revenue | ||||||||
| Gross Profit | ||||||||
| Operating Expenses | ||||||||
| Payroll and Related Expenses | ||||||||
| Operating and Maintenance | ||||||||
| Bad Debt | ||||||||
| Professional Services | ||||||||
| Utilities and Facilities | ||||||||
| Depreciation and Amortization | ||||||||
| General and Administrative | ||||||||
| Marketing and Advertising | ||||||||
| Application Development Costs | ||||||||
| Taxes and Insurance | ||||||||
| Total Operating Expenses | ||||||||
| Operating Income/(Loss) | ( | ) | ||||||
| Other Income and Expense | ||||||||
| Interest Expense | ( | ) | ( | ) | ||||
| Other Expenses | ( | ) | ||||||
| Total Other Income and Expenses | ( | ) | ( | ) | ||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Earnings (Loss) per Share | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
| Weighted Average Outstanding Shares | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
KonaTel, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| Common Shares | Additional | Accumulated | |||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | |||||||||||||||
| Balances as of January 1, 2021 | $ | $ | $ | ( | ) | $ | |||||||||||||
| Stock Based Compensation | — | ||||||||||||||||||
| Net Loss | — | ( | ) | ( | ) | ||||||||||||||
| Balances as of March 31, 2021 | $ | $ | $ | ( | ) | $ | |||||||||||||
| Common Shares | Additional | Accumulated | |||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Total | |||||||||||||||
| Balances as of January 1, 2022 | $ | $ | $ | ( | ) | $ | |||||||||||||
| Stock Based Compensation | — | ||||||||||||||||||
| — | — | — | — | — | |||||||||||||||
| Net Loss | — | ( | ) | ( | ) | ||||||||||||||
| Balances as of March 31, 2022 | $ | $ | $ | ( | ) | $ | |||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 6 |
KonaTel, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and Amortization | $ | $ | ||||||
| Bad Debt | ||||||||
| Stock-based Compensation | ||||||||
| Change in Right of Use Asset | ( | ) | ||||||
| Change in Lease Liability | ( | ) | ||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid Expenses | ||||||||
| Accounts Payable and Accrued Expenses | ( | ) | ||||||
| Deferred Revenue | ( | ) | ||||||
| Other Assets | ( | ) | ||||||
| Net cash provided by operating activities | ( | ) | ||||||
| Cash Flows from Investing Activities | ||||||||
| Net cash (used in) investing activities | ||||||||
| Cash Flows from Financing Activities | ||||||||
| Repayments of amounts of Notes Payable | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net Change in Cash | ( | ) | ||||||
| Cash - Beginning of Year | ||||||||
| Cash - End of Period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Right of use assets obtained in exchange for new operating lease liabilities | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 7 |
KonaTel, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview of Company
KonaTel Nevada (as defined below) was organized under the laws of the State of Nevada on October 14, 2014, by its founder and then sole shareholder, D. Sean McEwen, to conduct the business of a full-service MVNO (“Mobile Virtual Network Operator”) provider that delivered cellular products and services to individual and business customers in various retail and wholesale markets.
KonaTel Inc., a Delaware corporation, formerly known as Dala Petroleum Corp. (the “Company,” “we,” “our,” or “us”), also formerly known as “Westcott Products Corporation,” was incorporated as “Light Tech, Inc.” under the laws of the State of Nevada on May 24, 1984. A subsidiary in the name “Westcott Products Corporation” was organized by us under the laws of the State of Delaware on June 24, 1986, for the purpose of changing our name and domicile to the State of Delaware. On June 27, 1986, we merged with the Delaware subsidiary, with the survivor being Westcott Products Corporation, a Delaware corporation (“Westcott”). On December 18, 2017, we acquired KonaTel, Inc, a Nevada subchapter S-Corporation (“KonaTel Nevada”), in a merger with our acquisition subsidiary under which KonaTel Nevada became our wholly-owned subsidiary.
On December 31, 2018, we acquired Apeiron Systems, Inc. (www.apeiron.io) (“Apeiron Systems” or “Apeiron”), which is also our wholly owned subsidiary. Apeiron was organized in 2013 and is an international hosted services Communications Platform as a Service (“CPaaS”) provider that designed, built, owns and operates its national private core network, supporting a suite of business communications services, all accessible via proprietary Applications Programming Interfaces (“APIs”). As a Federal Communications Commissions (“FCC”) licensed Internet Telephony Service Provider (“ITSP”), Apeiron also holds an FCC numbering authority license. Some of Apeiron’s hosted services include Voice over IP (“VoIP”), cellular and Over-The-Top (“OTT”) telephony, SMS/MMS messaging and broadcast services, numbering features, including Cloud IVRs, Voicemail, Fax, Call Recording and other services through local, toll-free and international phone numbers. Supported by its national redundant network, Apeiron also provides public and private IP network services, including Multiprotocol Label Switching (“MPLS”), Dedicated Internet and LTE Wireless WAN solutions. Apeiron’s cloud services include Information Data Dips, Software-Defined Wide Area Networking (“SD-WAN”) and Internet of Things (“IoT”) data and device management. Apeiron primarily distributes its services nationally through its website, its sales staff, independent sales agents and Independent Sales Organizations (“ISOs”).
On February 5, 2018, we entered into a purchase agreement to acquire IM Telecom, LLC, an Oklahoma limited liability company (www.infinitimobile.com), doing business as Infiniti Mobile (“IM Telecom” or “Infiniti Mobile”). On October 23, 2018, the FCC approved our acquisition of IM Telecom, and on January 31, 2019, we completed the purchase of IM Telecom. IM Telecom operates as a wholly-owned subsidiary of KonaTel. It is an FCC licensed Eligible Telecommunications Carrier (“ETC”) and is one of twenty-two (22) original FCC licensed wireless cellular resellers to hold an FCC approved Lifeline Compliance Plan since 2012, of which approximately twelve (12) license holders remain active today. The FCC has not approved (granted) a new wireless reseller Lifeline Compliance Plan since 2012. As a licensed ETC, IM Telecom is currently authorized to distribute Lifeline subsidized mobile voice/data service in nine (9) states. In addition to Lifeline, IM Telecom is also an FCC licensed Affordable Connectivity Program (“ACP”) provider, authorized to distribute ACP subsidized high-speed mobile data service in the forty-eight (48) contiguous states plus Washington D.C. and Puerto Rico. Lifeline is an FCC program that provides subsidized, fixed or mobile telecommunications services to low-income Americans. ACP is an FCC program that provides subsidized high-speed wireless data services to low-income Americans. IM Telecom distributes Lifeline and ACP services under its Infiniti Mobile brand name through its website, sales staff, retail location and ISOs. IM Telecom also offers non-Lifeline and non-ACP services throughout the United States.
Apeiron Systems is headquartered in Los Angeles, California. It also has some management staff in Plano, Texas, customer service and software engineering resources staffed in Johnstown, Pennsylvania and software engineering services staffed in Europe and Asia. IM Telecom is headquartered in Plano, Texas, and operates a retail operation in Tulsa, Oklahoma.
We are headquartered in Plano, Texas. Apeiron Systems has fifteen (15) full-time employees; IM Telecom has five (5) full-time employees and four (4) part-time employees; and we have four (4) full-time employees.
Principal Products or Services and their Markets
Our principal products and services, across our two wholly-owned subsidiaries, Apeiron Systems and IM Telecom, include our CPaaS suite of services (SIP/VoIP, SMS/MMS), wholesale and retail mobile voice and mobile data IoT services, wholesale voice termination services, and our ETC and ACP subsidized services for low-income Americans. Except for our ETC Lifeline services distributed in up to nine (9) states and our ACP services distributed in the forty-eight (48) contiguous states, Washington D.C. and Puerto Rico, our Apeiron Systems’ products and services are available worldwide and subject to U.S., international and local/national regulations.
| 8 |
We generate revenue from two (2) primary sources, Hosted Services and Mobile Services:
| · | Our Hosted Services include a suite of hosted CPaaS services within the Apeiron Systems’ cloud platform, including Cloud IVRs, Voicemail, Fax, Call Recording and other services provided with local, toll-free and international phone numbers. Apeiron also delivers public and private IP network services from its national redundant network backbone, including MPLS, Dedicated Internet and LTE Wireless WAN solutions. Additionally, Apeiron’s Cloud Services include Information Data Dips, SD-WAN and IoT data and device management. These Hosted Services are marketed nationally and internationally through the Apeiron website, its sales staff, independent sales agents and ISOs. |
| · | Our Mobile Services include retail and wholesale cellular voice/text/data services and IoT mobile data services through our subsidiaries Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of government subsidized mobile voice service and mobile data service by IM Telecom under its Infiniti Mobile brand and FCC license to low-income American households that qualify for the FCC’s Lifeline mobile voice service program and/or the FCC’s ACP mobile data program. Even though government programs like Lifeline have existed since 1985, these programs, along with newer programs like the ACP program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced or eliminated. |
Basis of Presentation
Interim Financial Statements
The accompanying unaudited condensed interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2021.
The accompanying financial statements have been prepared using the accrual basis of accounting.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates in these financial statements include the allowance for doubtful receivables, allowance for inventory obsolescence, the estimated useful lives of property and equipment, stock-based compensation, and estimated life of customer lists. Actual results could differ from those estimates.
Basis of Consolidation
The condensed consolidated financial statements include the Company and three wholly-owned corporate subsidiaries, KonaTel Nevada, Apeiron Systems and IM Telecom. All significant intercompany transactions are eliminated.
Basic income (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. Dilutive common share equivalents are computed by using the “Treasury Stock Method,” which computes the number of new shares that may potentially be created by unexercised options. Diluted common share equivalents are stock based compensation options. The dilutive common shares for the three months ended March 31, 2022, are not included in the computation of diluted earnings per share, because to do so would be anti-dilutive.
| 9 |
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net income | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares outstanding during period on which basic earnings per share is calculated | ||||||||
| Effect of dilutive shares | ||||||||
| Incremental shares under stock-based compensation | ||||||||
| Weighted average shares outstanding during period on which diluted earnings per share would be calculated | ||||||||
| Earnings per share attributable to common stockholders | ||||||||
| Basic earnings per share | $ | $ | ( | ) | ||||
| Diluted earnings per share | $ | $ | ( | ) | ||||
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of receivables, cash and cash equivalents.
All cash and cash equivalents are held at high credit financial institutions. These deposits are generally insured under the FDIC’s deposit insurance coverage; however, from time to time, the deposit levels may exceed FDIC coverage levels.
The Company has a concentration of risk with respect
to trade receivables from customers and cellular providers. As of March 31, 2022, the Company had a significant concentration of receivables
(defined as customers whose receivable balances are greater than 10% of total receivables) due from two (2) customers in the amounts of
$
Concentration of Major Customer
A significant amount of the revenue is derived from
large customers and the government. For the three months ended March 31, 2022, the Company had two (2) customers that accounted for $
Effect of Recent Accounting Pronouncements
The Company has evaluated all recent accounting pronouncements and believes that none will have a significant effect on the Company’s financial statements.
NOTE 2 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following major classifications as of March 31, 2022, and December 31, 2021:
| March 31, 2022 | December 31, 2021 | |||||||
| Lease Improvements | $ | $ | ||||||
| Furniture and Fixtures | ||||||||
| Billing Software | ||||||||
| Office Equipment | ||||||||
| Less: Accumulated Depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| 10 |
Depreciation related to Property and Equipment amounted
to $
NOTE 3 – RIGHT-OF-USE ASSETS
Right-of-Use Assets consist of assets accounted for
under ASC 842. The assets are recorded at present value using implied interest rates between
The Company has Right-of-Use Assets through leases
of property under two (2) non-cancelable leases. As of March 31, 2022,
Future lease liability payments under the terms of these leases are as follows:
| 2022 | $ | |
| 2023 | $ | |
| 2024 | $ | |
| 2025 | $ | |
| 2026 | $ | |
| Total | $ | |
| Less Interest | $ | |
| Present value of minimum lease payments | $ | |
| Less Current Maturities | $ | |
| Long Term Maturities | $ |
The Company also leases two (2) office/retail spaces
on a month-to-month basis. Total lease expense for the three months ended March 31, 2022, and 2021, was $
NOTE 4 – INTANGIBLE ASSETS
Intangible Assets with definite useful life consist of licenses, customer lists and software that were acquired through acquisitions. Intangible Assets with indefinite useful life consist of a Lifeline License granted by the FCC.
The Lifeline License, because of the nature of the
asset and the limitation on the number of granted licenses by the FCC, will not be amortized. The Lifeline License was acquired through
an acquisition. The fair market value of the License as of March 31, 2022, was $
| March 31, 2022 | December 31, 2021 | |||||||
| Customer List | $ | $ | ||||||
| Software | ||||||||
| ETC License | ||||||||
| Less: Amortization | ( | ) | ( | ) | ||||
| Net Amortizable Intangibles | ||||||||
| Right of Use Assets - net | ||||||||
| Intangible Assets net | $ | $ | ||||||
Amortization expense amounted to $
NOTE 5 – NOTES PAYABLE
In 2020, the Company was granted a $
| 11 |
NOTE 6 – CONTINGENCIES AND COMMITMENTS
Litigation
From time to time, the Company may be subject to legal proceedings and claims which arise in the ordinary course of business. As of March 31, 2022, there are no ongoing legal proceedings.
Contract Contingency
The Company has the normal obligation for the completion of its cellular provider contracts in accordance with the appropriate standards of the industry and that may be provided in the contractual agreements.
Tax Audits
In June of 2021, the Company received an audit determination
and assessment from the State of Pennsylvania in respect of an audit of sales and use tax liability for the audit period of January 1,
2016, through September 30, 2019. The assessment is in the amount of $
Letters of Credit
The Company had no outstanding letters of credit as of March 31, 2022.
NOTE 7 – SEGMENT REPORTING
The Company operates within two (
The reportable segments consist of Hosted Services and Mobile Services.
Hosted Services – This segment includes a suite of hosted CPaaS services within the Apeiron Systems’ cloud platform, including Cloud IVRs, Voicemail, Fax, Call Recording and other services provided with local, toll-free, and international phone numbers. Apeiron also delivers public and private IP network services from its national redundant network backbone including MPLS, Dedicated Internet and LTE Wireless WAN solutions. Additionally, Apeiron’s Cloud Services include Information Data Dips, SD-WAN and IoT data and device management. These Hosted Services are marketed nationally through Apeiron’s website, its own sales staff, independent sales agents and ISOs.
Mobile Services – This segment includes retail and wholesale cellular voice/text/data services and IoT mobile data services through our subsidiaries Apeiron Systems and IM Telecom. Mobile voice/text/data and IoT mobile data services are supported by a blend of reseller agreements with select national wireless carriers and national wireless wholesalers. A wireless communications service reseller typically does not own the wireless network infrastructure over which services are provided to its customers. Mobile voice/text/data and mobile data solutions are generally sold as traditional post-paid service plans that may include voice/text/data or wireless data only plans. Sometimes equipment is provided, which can include, but is not limited to, phones, tablets, modems, routers and accessories. Also included in our Mobile Services segment is the distribution of cellular voice service and mobile data service by IM Telecom under its Infiniti Mobile brand to low-income American households that qualify for the FCC’s Lifeline voice service program and the FCC’s ACP mobile data program. Even though government programs like Lifeline have existed since 1985, these programs, along with newer programs like the ACP program, are subject to change and may have a material impact on our Mobile Services business if changed, reduced, or eliminated.
| 12 |
The following table reflects the result of operations of the Company’s reportable segments:
| Hosted Services | Mobile Services | Total | ||||||||||
| For the three months period ended March 31, 2022 | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| Gross Profit | $ | $ | $ | |||||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Additions to property and equipment | ||||||||||||
| Gross Margin % | % | % | % | |||||||||
| For the three months period ended March 31, 2021 | ||||||||||||
| Revenue | $ | $ | $ | |||||||||
| Gross Profit | $ | $ | $ | |||||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Additions to property and equipment | ||||||||||||
| Gross Margin % | % | % | % |
NOTE 8 – STOCKHOLDERS’ EQUITY
Common Stock
The Company has not issued common stock through March 31, 2022, nor for the year ended December 31, 2021.
Stock Compensation
The Company offers stock option equity grants to directors
and key employees. Options vest in tranches and typically expire in five (5) years. For the three months ended March 31, 2022, and 2021,
the Company recorded options expense of $
B. Todd Murcer, who was elected our Executive Vice
President of Finance and Secretary on February 4, 2022, was granted incentive stock options as of the effective date
of his Employment Agreement at an exercise price of $ per share, vesting on the four () year anniversary dates of the grants,
at the fair market value of our common stock on the date of grant or January 24, 2022. The stock option value of $ was computed
using the Black-Scholes-Merton pricing model using a stock price of $, a strike price of $
Jeffrey Pearl, an independent Board member, was granted quarterly
incentive stock options on January 28, 2022, at an exercise price of $, fully vested, which was 110% of the fair market value of
our common stock on the date of grant. The stock option value of $ was computed using the Black-Scholes-Merton pricing model using
a stock price of $, a strike price of $
Robert Beaty, an independent Board member, was granted quarterly
incentive stock options on February 12, 2022, at an exercise price of $, fully vested, which was 110% of the fair market value of
our common stock on the date of grant. The stock option value of $ was computed using the Black-Scholes-Merton pricing model using
a stock price of $, a strike price of $
Jason Welch, who was elected as the President of IM
Telecom on February 14, 2022, was granted incentive stock options as of the effective date of his Employment Agreement
at an exercise price of $ per share, vesting on the four () year anniversary dates of the grants, at the fair market value of
our common stock on the date of grant or February 14, 2022. The stock option value of $ was computed using the Black-Scholes-Merton
pricing model using a stock price of $, a strike price of $
| 13 |
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Life | Aggregate Intrinsic Value | ||||||
| Options Outstanding – December 31, 2021 | $ | $ | |||||||
| Granted | — | ||||||||
| Exercised | — | — | — | — | |||||
| Forfeited | — | — | — | — | |||||
| Options Outstanding – March 31, 2022 | $ | $ | |||||||
| Exercisable and Vested, March 31, 2022 | $ | $ | |||||||
NOTE 9 – SUBSEQUENT EVENTS
Below are events that have occurred since March 31, 2022:
Incentive Stock Option Grants
The Company granted two (2) quarterly director share Incentive Stock Options, one to Jeffrey Pearl on April 28, 2022, at an exercise price of $, fully vested; and one to Robert Beaty on May 12, 2022, at an exercise price of $, fully vested. The exercise prices were based upon 110% of the fair market value or closing public trading price of the Company’s common stock on the date of grant.
Additional Office Lease
As Management has decided to transition back to
domestic customer service operations, the Company’s subsidiary, IM Telecom, executed a three (
Debt Financing
On May 18, 2022, the Company entered into a non-binding
letter of intent to secure $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
When used in this Quarterly Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act regarding events, conditions and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position. Persons reviewing this Quarterly Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such factors are discussed further below under “Trends and Uncertainties,” and include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.
Overview of Current and Planned Business Operations
We continue to pursue market opportunities for the distribution of our current products and services described in our “Principal Products or Services and their Markets” summary on page 8 of this Quarterly Report. In addition, we continue to pursue expanded market distribution opportunities, development of new products and services, the addition of new lines of business and accretive acquisition opportunities that may enhance or expand our current product and service offerings.
Results of Operations
Comparison of the quarter ended March 31, 2022, to the quarter ended March 31, 2021
For the quarter ended March 31, 2022, we had $4,227,856 in revenues from operations compared to $2,392,838 for the quarter ended March 31, 2021, for a total revenue increase of $1,835,018. This increase in first quarter revenue was caused by an increase in both our Hosted Services and Mobile Services segments, with Mobile Services expanding due to the introduction of the ACP program, which also boosted the Lifeline program, adding additional revenues for the distribution of high-speed mobile data service to low-income consumers.
For the quarter ended March 31, 2022, our cost of revenue was $2,580,595 compared to $1,481,677 in the quarter ended March 31, 2021, for a cost of revenue increase of $1,098,918. Our first quarter cost of revenue increase was primarily the result of increased network, handset and sales commission costs related to distributing additional services.
For the quarter ended March 31, 2022, we had a gross profit of $1,647,261 compared to $911,161 in the quarter ended March 31, 2021, for a gross profit increase of $736,100 in the first quarter.
For the quarter ended March 31, 2022, total operating expenses were $1,596,556 compared to $1,141,641 in the quarter ended March 31, 2021, for an increase of $454,915 in the first quarter. This increase was due primarily to increases in payroll and related expenses resulting mostly from the hiring of management level operations positions in both our subsidiaries Apeiron Systems and IM Telecom.
For the quarter ended March 31, 2022, other income (expense) was $(95,154) compared to $(2,242) in the quarter ended March 31, 2021.
For the quarter ended March 31, 2022, we had a net loss of $44,449 compared to a net loss of $232,722 in the quarter ended March 31, 2021. The loss for the quarter ended March 31, 2022, was impacted by an acceleration of growth in our Mobile Services segment that increased our customer acquisition cost and some one-time charges described below.
As part of the Company’s Mobile Service expansion plan, the Company took one-time legal and regulatory charges in the first quarter 2022 of approximately $103,000 to support expansion into additional Mobile Service distribution territories (i.e., states).
Due to the success we are having with growing our Mobile Services subscriber base, Management has chosen, over the next two quarters, to accelerate growth within this segment, primarily influenced by expanded government subsidies and new wireless voice/data services for eligible low-income families. As a result, the Company recognized increases in Mobile Services revenue and direct costs during the quarter ending March 31, 2022. Since the Company may not capitalize customer acquisition costs over the average life of a customer, we recognize the full incremental cost of each new Mobile Service customer at the start of service, which is typically recovered within 100 days after activation. During this period of intentional accelerated growth, Management foresees a temporary reduction of gross margins as the Company continues to accelerate the expansion of its Mobile Service customer base.
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Liquidity and Capital Resources
As of March 31, 2022, we had $1,452,869 in cash and cash equivalents on hand.
In comparing liquidity between the three-month periods ending March 31, 2022, and March 31, 2021, cash assets increased by 155.2%. This increase was primarily attributable to adding more Mobile Services subscribers. Liabilities and total overall debt declined by 5.1% in the three-month period ended March 31, 2022, when compared to March 31, 2021. Growth in our Mobile Services customer base is expected to provide additional long-term liquidity, however, in the near term, additional operating capital may be required to support a period of expanding Mobile Services growth. Therefore, Management is currently working to secure short term debt financing to support the growth of our government subsidized Mobile Services.
Our current ratio (current assets divided by our current liabilities) decreased to 2.81 as of March 31, 2022, compared to .94 as of March 31, 2021. Working capital increased by 3,151.8%.
Cash Flow from Operations
During the three months ended March 31, 2022, cash flow provided by operating activities was $520,084, and for the three months ended March 31, 2021, cash flow used in operating activities was $114,538.
Cash Flows from Investing Activities
During the three months ended March 31, 2022, and 2021, no cash flow was used in investing activities.
Cash Flows from Financing Activities
During the three months ended March 31, 2022, no cash flow was used in financing activities. For the three months ended March 31, 2021, net cash flow used in financing activities was $31,321, for repayments of notes payable.
Going Concern
For the three months ended March 31, 2022, the Company generated a net loss of $44,449, compared to a net loss for the three months ended March 31, 2021, of $232,722. The Company has continued to sustain itself through the operations of the business, indicated by net cash from operations of $520,084 for the three months ended March 31, 2022. The accumulated deficit as of March 31, 2022, is $5,389,954.
The Company has continued to ameliorate any substantial going concern doubt by generating additional cash flow in the first quarter of 2022, the year ended 2021 and the year ended 2020; however, as the Company has started to increase its Mobile Services customer base in the first quarter of 2022 and for the foreseeable future, additional operating capital to may be required to support expanding customer acquisition costs (sales).
Off-Balance Sheet Arrangements
We had no Off-Balance Sheet arrangements during the three-month period ended March 31, 2022.
Critical Accounting Policies
Earnings Per Share
We follow ASC Topic 260 to account for the earnings per share. Basic earnings per common share calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income available to common stockholders by the weighted average number of common shares and dilutive common share equivalents outstanding. As of March 31, 2022, and March 31, 2021, there are 2,875,000 and 3,475,000 respectively, potentially dilutive common shares.
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Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of receivables, cash and cash equivalents.
All cash and cash equivalents are held at high credit financial institutions. These deposits are generally insured under the FDIC’s deposit insurance coverage; however, from time to time, the deposit levels may exceed FDIC coverage levels.
The Company has a concentration of risk with respect to trade receivables from customers and cellular providers. As of March 31, 2022, the Company had a significant concentration of receivables (defined as customers whose receivable balances are greater than 10% of total receivables) due from two (2) customers in the amounts of $802,886, or 85.5% and $109,975, or 11.7%. It should be noted that the largest customer is the FCC. As of December 31, 2021, the Company had a significant concentration of receivables from two (2) customers in the amounts of $783,431, or 63.9%, and $194,647, or 15.9%.
Concentration of Major Customer
A significant amount of the revenue is derived from contracts with major customers and cellular partners. For the three months ended March 31, 2022, the Company had two (2) customers that accounted for $915,837 or 21.7% and $2,431,569 or 57.5% of revenue, respectively. For the three-month period ended March 31, 2021, the Company had one (1) customer that accounted for $830,134, or 34.7%, of revenue.
Effect of Recent Accounting Pronouncements
The Company has evaluated all recent accounting pronouncements and believes that none will have a significant effect on the Company’s financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not required.
Item 4. Controls and Procedures.
Management’s Quarterly Report on Internal Control Over Financial Reporting
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that material information relating to us is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness, as of March 31, 2022, of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Not required; however, see Item 1A. Risk Factors, Part I, commencing on page nine (9) of the Company’s 10-K Annual Report for the fiscal year ended December 31, 2021, filed with the SEC on April 14, 2022, for a list of “Risk Factors,” which Annual Report can be accessed by Hyperlink in Part II, Item 6 hereof.
Our business operations could be impacted by the current world health crisis. The following risk factor regarding the COVID-19 pandemic was one of the risk factors included in the Company’s 10-K Annual Report for the year ended December 31, 2021:
On January 30, 2020, the World Health Organization declared the coronavirus (the ‘COVID-19’) outbreak a “Public Health Emergency of International Concern,” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical areas in which we operate. While it is unknown how long these conditions will last and what the complete financial effect will be on us, to date and as a result of actions taken by management to mitigate a material impact to our financial statements or our operational results, we are not currently experiencing a material impact to our financial statements or our results of operations; however, a pandemic typically results in social distancing, travel bans and quarantines, which may result in limited access to our facilities, customers, management, support staff and professional advisors. These, in turn, may not only impact our operations, financial condition and demand for our services, but our overall ability to react timely to mitigate the impact of this event. Given our small staff, if a key member of our team were disabled by COVID-19, it could have a material negative impact on our business. Also, it may substantially hamper our efforts to provide our investors with timely information and to comply with our filing obligations under the Exchange Act with the SEC. If this pandemic were to last a prolonged period of time, we could see a decline in revenue due to the closure of customer businesses, which could then impact our ability pay our short-term debts. Our concentration of revenue from a small group of Apeiron Systems’ customers makes it reasonably possible that we are vulnerable to the risk of a long-term severe impact. Our dependence on certain suppliers to provide equipment to be distributed or sold to our customers could also be impacted if inventory shortages occur due to import or export restrictions resulting from the pandemic.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
See NOTE 8-Stockholders’ Equity and NOTE 9-Subsequent Events, of our Condensed Consolidated Financial Statements included in this Quarterly Report respecting the grant of certain additional incentive stock options during and subsequent to the quarter ended March 31, 2022.
Item 3. Defaults upon Senior Securities
None; not applicable.
Item 4. Mine Safety Disclosure
Not applicable.
Item 5. Other Information
On March 28, 2022, the Company’s board of directors consented to extend the exercise period of all vested shares under the Incentive Stock Options granted former employees Nick Metherd and Paul LaPier for an additional ninety (90) days following their respective resignations from the Company, by reason of their providing of continued consulting services to the Company.
Additionally, earlier today, the Company disseminated a press release (Exhibit 99 hereto) regarding the earnings set forth in this Quarterly Report, and this press release in being furnished for the purposes of Section 18 of the Exchange Act and “SEC Regulation FD Disclosure” only. This press release shall not be deemed to be incorporated by reference into our filings under the Securities Act of the Exchange Act.
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Item 6. Exhibits
|
Exhibit Number |
Description of Exhibit | Filing | ||
| 3(i) | Amended and Restated Certificate of Incorporation | Filed with the Form 8-K/A filed on December 20, 2017, and incorporated herein by reference. | ||
| 3(ii) | Amended and Restated Bylaws | Filed with the Form 8-K/A filed on December 20, 2017, and incorporated herein by reference. | ||
| 14 | Code of Ethics | Filed with the Form 8-K/A filed on December 20, 2017, and incorporated herein by reference. | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||
| 99 | Earnings Press Release dated May 23, 2022 | Filed herewith. | ||
| 101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, were formatted in Inline XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||
| 104 | Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL. |
Exhibits incorporated by reference:
| 19 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| KonaTel, Inc. | ||||
| Date: | May 23, 2022 | By: | /s/ D. Sean McEwen | |
| D. Sean McEwen | ||||
| Chairman and CEO | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Date: | May 23, 2022 | By: | /s/ D. Sean McEwen | |
| D. Sean McEwen | ||||
| Chairman and CEO |
| Date: | May 23, 2022 | By: | /s/ Brian R. Riffle | |
| Brian R. Riffle | ||||
| Chief Financial Officer |
20